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Summary

  • InvenSense is rapidly ramping up its R&D efforts to tap the growing market for motion tracking sensors.
  • InvenSense's product development has helped it gain market share and it is supplying sensors to big players such as Samsung.
  • InvenSense's earnings are expected to grow rapidly going forward, making it a solid long-term buy.

Chipmaker InvenSense (NYSE:INVN) has underperformed this year with shares down 13%. In addition, InvenSense's recent fourth-quarter results were also underwhelming with revenue rising to only $59 million from $55.2 million in the year-ago quarter. Although the revenue performance was better than estimates, the company missed on the bottom line. Also, InvenSense's outlook for the current quarter was weak.

Additionally, InvenSense's net loss for the fourth quarter of 2014 was $5.6 million, compared to a net income of $13.6 million in the prior-year period. This performance is bad considering InvenSense is expected to profit from the fast-growing market for wearable devices. Now the question is, should investors continue to bet on InvenSense for the long run, or is it a stock to stay away from. Let's take a look.

Investing for growth

The reason why InvenSense's earnings were below par can be attributed to its aggressive investments in research and development. According to management, the increase in operating expenditure was a result of:

"...increased investment in research and development in order to support an expanded roadmap; strategic customer development initiatives and extensive new product and customer qualification activities; and the addition on November 1, 2013, of the audio sensor-related engineering resources associated with the MEMS microphone product line from Analog Devices."

However, these investments should drive the company's growth in the long run as they are aimed at bolstering the company's product portfolio. In addition, InvenSense also increased its headcount to tap the substantial global customer opportunity that it is seeing. It grew its sales channels in areas such as China, where the adoption of MotionTracking and audio solutions by major consumer electronics customers is gaining steam. Also, InvenSense expanded its marketing efforts to target new opportunities.

So, a combination of solid product development moves and an effort to increase its end-market opportunities should help the company perform well going forward.

One of its key initiatives in fiscal 2014 is to increase investment in R&D to support three primary areas of activity: new product development; expansion of its software and algorithm capabilities that extend its competitive differentiation; and the increased costs associated with extensive new customer qualification activities.

Solid product development

This increased investment in R&D has enabled it to take a competitive lead in the market, allowing it to lay the foundation for exciting growth opportunities in fiscal 2015. For example, during the year, it increased the number of SoCs that integrate its third-generation DMP technology, allowing for faster and more efficient algorithms and software. It has already won multiple designs with this product and its various derivatives, which will ramp into production later this year.

As a result of such moves, InvenSense did well despite weakness in the gaming sector and a competitive pricing environment. The company achieved growth due to significant share gains in its served markets, coupled with a steady increase in attach rates of gyroscopes in a wide variety of applications.

According to management, InvenSense also expanded its lead in the nascent and fast-growing markets of optical image stabilization, or OIS, and wearable and fitness devices. Furthermore, it introduced several industry firsts and highly-differentiated solutions with increased investments in R&D. These solutions combine extremely accurate sensors with sophisticated software and algorithms, allowing InvenSense to command premium value for its products.

InvenSense has made good progress on its strategy of transitioning from a MEMS motion sensor company to a MotionTracking solutions company, offering a full suite of motion and audio system on chips, or SoC, and embedded software.

Witnessing strong demand

The company is seeing strong demand in China, with both its 6-axis MotionTracking solutions and its 2-axis optical image stabilization products being adopted at a good pace. InvenSense also saw an increase in gyro attach rates that are increasing in mid- and high-end smartphones such as Xiaomi and Oppo. Additionally, several high-end brands are also adopting its OIS solutions. Also, InvenSense's saw volume shipments in several flagship customer products, such as Samsung's (OTC:SSNLF) Galaxy S5 and wearable devices such as Samsung Gear 2 and Gear Fit.

InvenSense is seeing an acceleration in customer design wins with its MotionTracking SoCs, which utilize its Digital Motion Processing (DMP) technology, coupled with its motion algorithms and MotionApps. InvenSense management is of the opinion that the company is gaining significant market share in mobile devices, including all of the top 10 Android smartphone makers. It has achieved this impressive feat in a very competitive environment on the back of the additional value that its products provide in areas of performance, power, and algorithms.

In the last quarter, it also introduced the first integrated 7-axis device with gyro, accelerometer, and pressure sensor all integrated into one silicon die. It introduced a reference design, complete with automatic activity recognition, or AAR, software library and low-power wireless connectivity. It is already receiving strong interest for this product from smartphone OEMs, health and fitness applications and brands, immersive gaming, wearable computing and big data customers. These potential customers are interested in collecting, tracking, and monetizing activity data, and InvenSense is trying to provide just that with its chips.

The company also introduced a number of MEMS microphone products, such as an ultra-low-power, always-on microphone, an industry-leading 70 dB microphone, and a high-performance top-port microphone for smartphones. Hence, it is quite clear that InvenSense is making some good moves as far as product development is concerned, and these products should help the company record good growth in the future.

Valuation and conclusion

The weakness in InvenSense's share price and the fall in earnings have made the stock expensive with a trailing P/E of almost 250. However, its forward P/E is just 18, signifying terrific earnings growth going forward. In fact, InvenSense's earnings are expected to grow at a robust annual rate of 22.40% for the next five years. Hence, investors should definitely think of adding this stock to their portfolio, and its decline so far this year is a great opportunity to capitalize on its long-term prospects.

Source: 3 Reasons Why InvenSense Is A Convincing Investment